Banks Still Raking In the Profits from Overdraft Fees

If you've ever witnessed a great white shark attack, you know the meaning of the word "relentless." The giant creature's dorsal fin traces a circle in the water as it spots a vulnerable victim; the shark makes a first strike, then a second and a third, coolly and methodically; the victim struggles, weakens and finally succumbs to the massive loss of blood. Some victims survive, of course --- but for many, once marked for attack, it's only a matter of time.

It seems that sharks and bankers have a lot in common.

This thought came to me as I read a new report from Moebs with some surprising news: overdraft fees are back. To be precise, as ABCNews.com reported, Moebs found that total revenue from overdraft fees grew from $30.8 billion in June 2011 to $31.5 billion in June 2012, a whopping $700 million increase.

This new surge is surprising, in part, because it comes after four years of major declines --- in fact, between 2008 and 2011, overdraft revenue had dropped by $6 billion. But it's also surprising for another reason: just two years ago, the big banks were mounting a massive and well documented hissy-fit, complaining that a 2010 change by the Federal Reserve in the regulation of overdraft fees would dramatically slash bank revenues, forcing them to eliminate such consumer-friendly features as free checking just to survive.

It's clear now that the bankers' plaintive cries of woe were overblown. But what's even more transparent is the bottom-feeding way the banks have found to turn around their fortunes despite the supposedly devastating blow imposed by the Fed in 2010. Simply put, the formula goes like this: find the weak and squeeze with all your might.

A little background: Until 2010, U.S. banks could automatically sign up customers for "overdraft protection" programs, and they signed them up like there was no tomorrow --- a maneuver that brought them tens of billions of dollars in overdraft fees. Consumers (and some members of Congress) rightly complained that these fees were predatory and unfair, noting their disproportionate impact on the poor, the elderly, and minorities, and the perverse techniques the banks used to maximize their gains --- including the reordering of transactions from biggest to smallest in order to take as many "bites" as possible.

After a massive tussle, the Federal Reserve imposed a requirement that sounds like a no-brainer: that banks must get customers' consent before signing them up for a "service" that many never asked for. Consumer groups sought even stronger restrictions, correctly predicting that the changes proposed by the Fed would not be enough to protect consumers from abuse. While praising the extension of the new rule to all debit-card holders, a coalition of consumer advocates noted: "The rule addresses neither the high cost of the overdraft fee relative to the overdraft amount nor the frequency with which overdraft fees may be charged. It also does not address manipulation of posting order to maximize overdraft fees."

As it turned out, the failure by the Fed to address these demands was decisive in leading to the current situation --- though you wouldn't have known at the time that the banks had anything to be happy about. Discussing the new regulations in a 2010 letter to shareholders, Chase CEO Jamie Dimon said that "we estimate these changes will reduce our after-tax income by approximately $500 million annually."